BILL ANALYSIS
By: Keffer, Jim
BACKGROUND AND PURPOSE
Texans pay more in property taxes than for any other state or local tax. In tax year 2003, 3,702 local taxing units levied almost $29 billion in property taxes, of which school districts accounted for more than 60 percent, according to the Comptroller of Public Accounts. From 1985 to 2003, the school district property tax levy increased by approximately 260 percent. Currently, Texas ranks 45th among the states in terms of homeownership levels. The high property tax burden impairs Texans' ability to own their own homes. HB 3 raises state revenue to fund a significant property tax reduction for Texas taxpayers.
RULEMAKING AUTHORITY
It is the committee's opinion that rulemaking authority is expressly granted to the Commissioner of Education in SECTION 1B.02, to the Comptroller of Public Accounts in SECTIONS 2A.07, 2B.07, 2B.10, 2C.03, 3B.07, and 6.01, and to the Texas Commission on Environmental Quality in SECTION 9.01.
ANALYSIS
LIMITATION ON SCHOOL DISTRICT TAX RATE
Part A of Article 1 of the bill decreases the cap on the school district maintenance and operations (M&O) tax rate from $1.50 per $100 valuation of taxable property to $1.21 beginning with the 2006 tax year. For the 2005 tax year, the maximum M&O rate is $1.25. The bill also permits an enrichment tax at a rate of $0.15 per $100 valuation of taxable property beginning with the 2006 tax year, as authorized by an election under Chapter 42, Education Code.
The bill provides that a school district election held before January 1, 2005, authorizing an M&O tax rate equal to or greater than $1.25 is sufficient to authorize a rate of $1.25 for the 2005 tax year, and a school district election held before January 1, 2006, authorizing an M&O rate equal to or greater than $1.21 is sufficient to authorize a rate of $1.21 beginning with the 2006 tax year.
Part A applies beginning with the 2005 tax year, and provides that a 2005 tax rate adopted by a school district before Part A takes effect is invalidated if the M&O rate exceeds the maximum rate permitted after Part A takes effect, and requires the district to adopt a new tax rate in accordance with the changes in law made by Part A. Part A includes administrative provisions that apply when a tax rate is so invalidated. Part A also validates certain actions taken before the effective date related to the adoption of a tax rate in accordance with the law as amended by Part A.
BUY-DOWN OF SCHOOL DISTRICT TAXES
Part B of Article 1 of the bill amends Chapter 403, Government Code, by adding Subchapters O and P. Subchapter O requires the comptroller, in advance of a regular session of the legislature, to certify the amount of any increase in available state revenue for the succeeding state fiscal biennium, requires the comptroller to distribute to school districts for tax rate reduction a portion of that increase in addition to an amount equal to the amount of available state revenue distributed in the preceding state fiscal biennium for school district tax rate reduction, specifies how the money is to be apportioned among school districts, and requires that the money received be applied to reducing the maintenance and operations tax rate of the school district.
Subchapter P creates a school property tax relief fund in the general revenue fund and requires the comptroller to transfer the amount of the increase in state revenue attributable to changes in law made by H.B. No. 3 to the school property tax relief fund, with certain exceptions, and to report the amount of the transfer to the governor, the LBB, and the legislature.
The bill adds Section 42.3112, Education Code, which provides that revenue received by a school district under Subchapter O, Chapter 403, Government Code, is treated as maintenance and operations tax revenue for purposes of Chapter 41 and 42, Education Code, and authorizes the commissioner of education to adopt rules to administer the section.
The bill amends Section 26.08, Tax Code, to provide that state funds for property tax rate reduction distributed to a school district under Subchapter O, Chapter 403, Government Code, be taken into account when determining the school district's rollback tax rate, reduces the rollback tax rate by 2 cents per $100 of taxable value, and repeals certain temporary rollback tax rate provisions.
PROPERTY TAX ADMINISTRATION
Part C of Article 1 of the bill provides special taxable situs rules for certain mobile portable drilling rigs, other than offshore drilling rigs, and associated equipment.
Part C provides for closing certain administrative or judicial proceedings to the public if confidential ad valorem tax information is disclosed, and provides that certain proceedings conducted by an appraisal review board panel are not considered the deliberation of public business by the appraisal review board.
Part C also permits an arbitrator in an ad valorem tax arbitration to require an appraisal district to provide meeting space for an arbitration.
REDUCTION IN SCHOOL TAX FREEZE FOR ELDERLY AND DISABLED; INCREASE IN SCHOOL DISTRICT RESIDENCE HOMESTEAD EXEMPTION
Part D of Article 1 of the bill conforms certain statutes relating to residence homesteads to the proposed constitutional amendment increasing the homestead exemption from school taxes to $22,500 and providing for the adjustment of the limitation on school taxes ("tax freeze") on the residence homesteads of certain elderly and disabled persons in accordance with the increased exemption and in proportion to future school tax rate changes.
Part D adds Section 42.3053, Education Code, to provide school districts with additional state aid until September 1, 2007, to compensate for local taxes lost because of the exemption increase and adjusted tax freeze, and enacts related administrative provisions.
Part D takes effect January 1, 2006, but only if the constitutional amendment increasing the residence homestead exemption from school taxes and providing for tax freeze adjustments is approved by the voters.
AD VALOREM TAXATION OF CERTAIN RAIL FACILITY PROPERTY OWNED BY CERTAIN RURAL RAIL TRANSPORTATION DISTRICTS
Part E of Article 1 of the bill provides that a leasehold or other possessory interest in exempt property may not be listed in the appraisal records by a chief appraiser if the exempt property is part of a rail facility owned by certain rural rail transportation districts. The change in law takes effect January 1, 2006, and applies beginning with the 2006 tax year.
FRANCHISE TAX
Article 2 relates to changes in the application and administration of the franchise tax, currently imposed under Chapter 171, Tax Code. It is divided into five parts as follows:
PART A. CORPORATE OWNERSHIP IN PARTNERSHIPS
PART B. APPLICATION TO PARTNERSHIPS
PART C. ADD-BACK OF CERTAIN PAYMENTS
PART D. TRANSITIONAL PROVISIONS
PART E. TEMPORARY CREDIT
PART A. CORPORATE OWNERSHIP IN PARTNERSHIPS
Part A of Article 2 amends the franchise tax in Chapter 171, Tax Code, to extend the application of the tax to certain corporate ownership interests in partnerships. It does not, however, extend the application of Chapter 171, Tax Code, to entities other than corporations as currently defined by that chapter. It adds definitions of "partner," "partnership." and "trust" to the law.
Part A provides, in new Section 171.001(d), Tax Code, the circumstances under which a foreign corporation, through holding certain partnership interests, will be considered as doing business in this state for the purposes of the franchise tax. However, a foreign corporation is not doing business in this state solely because the corporation holds an interest in a real estate investment trust.
If a corporate partner asserts that the tax imposed as a result of the application of new Section 171.001(d), Tax Code, violates the United States Constitution or federal law, the franchise tax is imposed on the partnership doing business in Texas and provides the manner in which the franchise tax liability of the partnership is calculated. A partner who owns an interest in an upper tier partnership is considered to be both a partner in the upper tier partnership and a partner is each lower tier partnership.
In determining how a corporation's earned surplus is apportioned, the corporation shall count the gross receipts of each partnership and joint venture in which the corporation directly or indirectly owns an interest. Part A also provides that in computing net taxable earned surplus, the corporation shall include the corporation's share of a partnership's items of income or loss, without regard to whether the partnership is taxed as a corporation for federal income tax purposes. Part A also provides for how net taxable capital for a partnership is computed.
The comptroller's enforcement powers are enhanced by the ability to secure a lien on a person's interest in a partnership doing business in this state whose activities cause the person to be subject to the franchise tax.
Part A takes effect September 1, 2005, if the bill gets immediate effect and on the first day of the first month that begins on or after the 91st day after the last day of the legislative session if the bill does not get immediate effect. Part A applies to reports originally due on or after the effective day of the part.
PART B. APPLICATION TO PARTNERSHIPS
Part B of Article 2 takes effect only if a court enters a final judgment that the application of new Section 171.001(d), Tax Code, added by Part A of Article 2, violates the United States Constitution.
If Part B does take effect, it repeals the provisions of Part A.
Part B extends the application of Chapter 171, Tax Code, to each partnership that does business in Texas and that is owned directly or indirectly by a corporation, to the extent the partnership is not owned by a natural person. The definition of "corporation" is amended to reflect this extension of the tax.
Part B provides that the reportable federal taxable income of a partnership is the partnership's income as an entity, to the extent that the partnership is now owned by a natural person and as determined by rules adopted by the comptroller.
The comptroller's enforcement powers are enhanced by the ability to secure a lien on a person's interest in a partnership doing business in this state whose activities cause the person to be subject to the franchise tax. Additionally, the comptroller may, in the same circumstances in which corporate privileges are forfeited, seek the forfeiture of the right of a partnership to transact business in Texas.
Part B has transitional provisions for partnerships first becoming subject to the franchise tax, and the comptroller is required to adopt rules to establish applicable reporting periods.
PART C. ADD-BACK OF CERTAIN PAYMENTS
Part C of Article 2 takes effect regardless of whether Part A or Part B is in effect.
Addressing the so-called "Geoffrey's" loophole, Part C adds new Sections 171.1001 and 171.1101, Tax Code, that require a corporation, in determining its net taxable earned surplus, to add back to reportable federal taxable income any royalty payment, interest payment, or management fee payment made to a related entity. Certain "safe harbors"--circumstances in which a corporation does not have to make these required add-backs--are provided in new Section 171.1102, Tax Code.
The comptroller in new Section 171.1103, Tax Code, is empowered to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among two or more organizations, trades, or businesses, under certain circumstances. In performing this function, the comptroller is required to apply the administrative and judicial interpretations of Section 482, Internal Revenue Code.
Each limited partnership doing business in Texas is required to file with the comptroller a disclosure that identifies each of its limited partners that owns at least a 20 percent interest in the partnership.
PART D. TRANSITIONAL PROVISIONS
Part D of Article 2 provides transitional provisions relating to a corporation coming under the franchise tax for the first time.
Except as otherwise provided in Parts A, B, and C, Article 2 takes effect September 1, 2005, if the bill gets immediate effect and on the first day of the first month that begins on or after the 91st day after the last day of the legislative session if the bill does not get immediate effect. Part D applies to reports originally due on or after the effective day of the part.
PART E. TEMPORARY CREDIT.
Part E establishes a temporary credit on net taxable earned surplus beginning in 2006 for those corporations becoming subject to the franchise tax as a result of the application of Section 171.001(d)(3), Tax Code, and provides for the computation of the credit. An additional tax of .2 percent of the corporation's net taxable capital is imposed during each year the corporation takes the credit.
SALES TAX
The bill increases the state sales and use tax rate from 6 1/4 percent to 7 percent. The tax is imposed on:
(1) computer programs, except for their creation, including development;
(2) motor vehicle repair services; and
(3) the full cost of Internet access service.
The bill repeals the law providing for a discount for retailers for timely remittance of tax receipts and makes conforming amendments.
The bill exempts from the taxes imposed by Chapter 151, Tax Code, the receipts from the sales, use, storage, rental, or other consumption in this state of services that became subject to the taxes because of the terms of the bill and that are the subject of a written contract or bid entered into on or before September 1, 2005. This exemption expires October 1, 2007.
The bill includes transitional provisions relating to the tax and provides that the tax provisions, other than the provision increasing the tax rate, take effect September 1, 2005, or, if the Act does not receive the necessary vote, on the first day of the first month that begins on or after the 91st day after the last day of the legislative session. The provision increasing the tax rate takes effect October 1, 2005, or, if the Act does not receive the necessary vote, on January 1, 2005.
MOTOR VEHICLES
The tax on sales, rentals, and use of motor vehicles is increased from 6 1/4 percent to 7 percent.
The bill requires the county tax assessor-collector to compute the amount of the tax due on the sale of a motor vehicle. If the amount paid for a motor vehicle is equal to or greater than the standard presumptive value of the vehicle, the tax is on the amount paid. If the amount is less than the standard presumptive value, the tax is on the standard presumptive value, unless the purchaser establishes the retail value. The bill requires the Department of Transportation to maintain information on the standard presumptive values of motor vehicles. The bill also requires the Department of Transportation, by December 1, 2005, to establish standard presumptive values, modify the department's registration and title system to include that information, and make that information available through the system to all county tax assessor‑collectors.
The bill includes transitional provisions relating to the motor vehicle provisions and provides that Section 152.0412, Tax Code, takes effect December 1, 2005, and that the remaining provisions relating to motor vehicles take effect September 1, 2005, or, if the Act does not receive the necessary vote, take effect on the first day of the first month that begins on or after the 91st day after the last day of the legislative session.
BOATS AND BOAT MOTORS
The bill increases the tax on the sale and use of boats and boat motors from 6 1/4 percent to 7 percent.
The bill includes transitional provisions relating to the boat and boat motor provisions and provides that the provisions relating to boats and boat motors take effect September 1, 2005, or, if the Act does not receive the necessary vote, take effect on the first day of the first month that begins on or after the 91st day after the last day of the legislative session.
TOBACCO PRODUCTS
The bill increases the tax on cigarettes from $20.50 per thousand on cigarettes weighing three pounds or less per thousand to $70.50 per thousand on cigarettes weighing three pounds or less per thousand. The bill increases the taxes on cigars in each of the four classes of cigar. The bill increases the tax on tobacco products other than cigars from 35.213 percent to 40 percent of the manufacturer's list price.
The bill provides that the provisions relating to tobacco products take effect September 1, 2005, or, if the Act does not receive the necessary vote, on the first day of the first month that begins on or after the 91st day after the last day of the legislative session.
COLLECTION OF DELINQUENT OBLIGATION TO STATE
The bill requires state agencies to report to the attorney general any uncollected and delinquent obligations on or after the 120th day after the date the obligation becomes delinquent. The bill authorizes the attorney general to provide legal services for collection of the obligation, directly contract with one or more persons to collect the obligation, or authorize the state agency to contract with one or more persons to collect the obligation. The bill prescribes guidelines in relation to those contracts and the contracting parties, including the compensation allowed under the contracts, the powers and duties of the person with whom attorney general or agency contracts, the sharing of information, and liability issues.
USE OF CERTAIN TRAFFIC PENALTIES FOR SCHOOL PROPERTY TAX RELIEF
Article 6 of the bill requires a local authority to remit a civil or administrative penalty received from a photographic traffic signal enforcement system to the comptroller for deposit to the credit of the school property tax relief fund. The local authority may retain $1 of the penalty.
UNCLAIMED PROPERTY
Article 7 of the bill allows a person who holds unclaimed property to petition for a hearing regarding the determination that the property should have been delivered to the comptroller. Article 7 also amends Subchapter A, Chapter 74, Property Code, by stating that the single business enterprise doctrine does not apply to Chapter 74, Property Code.
TEXAS ECONOMIC DEVELOPMENT ACT
The bill extends the sunset date of Subchapters B, C, and D of the Texas Economic Development Act (Chapter 313, Tax Code). The bill also amends that Act so that Subchapters B, C, and D of the Act apply to any entity that is subject to the state's franchise tax.
The bill provides that a school district that elects to consider an application from a property owner under Subchapter B of the Act is required to request the Texas Education Agency to conduct an economic impact evaluation of the application on behalf of the district and that the TEA is required to conduct that evaluation for the district, that the school district is required to provide TEA with any requested information and the TEA is authorized to development methodologies, that the economic impact evaluation is binding on the school district and the applicant, that the school district shall provide a copy to the applicant, that the TEA may charge and collect a fee that covers its costs, and that the 120-day period for a school district to approve or disapprove an application is extended if the economic impact evaluation is not received from the TEA.
The bill makes a nonsubstantive change in the organization of the applicability section of Subchapter C of the Act. The bill provides that a rural school district to which Subchapter C applies and in which a federal nuclear facility is located continues to be covered by Subchapter C, even if Subchapter C would otherwise cease to apply to the school district. The bill also provides that for a rural school district in certain counties, for the qualifying jobs that must be created by a property owner, each must pay at least 110 percent of the average weekly wage for manufacturing jobs in the region, and that this requirement applies only to an application from a property owner under Subchapter C filed on or after the effective date of the bill.
RADIOACTIVE SUBSTANCES FEE
Article 9 of the bill creates a state fee that must be paid by holders of a license that authorizes the storage and disposal of a radioactive substance from other persons. The fee does not apply to compact waste, federal facility waste, or industrial solid waste. The fee is an amount equal to 10 percent of the license holder's gross receipts received from storage or disposal operations and the article adds a definition of gross receipts. The article also gives the commission authority to audit a license holder's financial records and waste manifest information to insure that the fees imposed are accurately paid.
CHARITABLE BINGO BY CERTAIN INDIAN TRIBES
Article 10 of the bill authorizes nonprofit organizations organized under the tribal law of certain Indian tribes to qualify as fraternal organizations authorized to conduct bingo in this state. The provisions apply only to certain tribes that are not subject to the federal Indian Gaming Regulatory Act. The bingo games must be conducted on a reservation under tribal rules that conform to Texas law, and must be conducted in accordance with Texas law and in compliance with certain federal laws. The organization must collect certain bingo prize fees and remit the fees to the state for deposit to the credit of the school property tax relief fund.
APPROPRIATION TO THE COMPTROLLER
Article 11 of the bill makes an appropriation to the comptroller for the implementation of the provisions of the Act.
EFFECTIVE DATE
The bill takes effect September 1, 2005, or, if the Act does not receive the necessary vote, the bill takes effect on the 91st day after the last day of the legislative session, except as otherwise provided by the bill.